Mary Holm: If the scheme looks too good to be true ...

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Q: It has come to my attention that there is a financial scheme called XYZ circulating New Zealand.

A couple have discussed it with me. I feel it is a pyramid type of investment and do not see how they could have doubled their money in three months. I suggested they took their original deposit out but was told it was in the system until April.

Have you had warning signals about this Christian company on your radar? It would be very interesting to find out as it could save gullible people investing their savings unwisely.

(Further email a day later): The couple are now going to invest some money for their grandchildren ... !! They are convinced that being Christian means being honest. I say why should they have to mention the fact? Also, how honest is the friend that has convinced them to invest?

A: Yikes! The first thing I did on receiving your letter was Google the company name, which I've changed to XYZ for two reasons. They might try to sue me. And in any case, my comments would apply to any company offering such high returns.

Included in the options that came up when I Googled - before I had even finished typing the company name - was "XYZ scam". And there were lots of websites under that heading.

That doesn't prove anything, of course. It's always possible competitors or jealous people are besmirching the company. But it would be enough to send me running in the opposite direction.

A basic rule about investing: if a company seems at all iffy, give it a miss. There are many other rock-solid investments.

"Well, yes," some people might say, "but not ones that double your money in three months."

If returns like that are not a warning sign, I don't know what is.

It's possible that the early investors' money will double over a short period.

That might be why this couple's friend is roping them in, because he or she has received fabulous returns. But I mean "fabulous" in the old sense - "told about in fables or imaginary".

Promoters of scams often recruit local people with credibility and deliver extreme returns to them. It's part of the set-up costs.

The recruited people then rush to share their good fortune with others. It must be horrible when they see their friends and family lose heaps - and even more horrible for the losers.

Another basic rule about investing: the only way a genuine investment can double in three months is if it's extremely risky and there's a huge chance you will lose most or all of your money.

Doubling in 10 years is reasonable for, say, a diversified share or property investment. To get that, you need a return of about 7 per cent a year. But doubling in three months or even a year or two is silly stuff.

As for the Christian connection, there have been some bad things done over the centuries by people who used that label.

If the promoters of XYZ really are Christians and they really can double money in three months, why don't they just invest their own and borrowed money until they have a vast amount to give to starving children around the world?

Three further points:

 Other words you could Google with the company name are "fraud", "warning" or "review".

 After Googling the company, I went to the scam alert list on the Financial Markets Authority's website, which you can find here. XYZ is not listed there, but that might mean only that the company is new to New Zealand and the FMA hasn't heard about it yet.

With that in mind, I told the FMA about the company and it is looking into it. You can do the same if you smell a rat about any investment, through the Contact Us page on fma.govt.nz. You don't have to fill out your contact details. And if you do, the FMA will not give your details to anyone else without your permission.

 In case other readers are wondering, I answered this correspondent straight away suggesting her friends stay away from XYZ. Waiting for the weekend column might have been too late!

Reverse mortgage

Q: My mother, who is in her 70s, is interested in getting a reverse mortgage like the ones described in your column recently.

The problem we foresee is if she needs to go into care then there is less available to pay for that once the loan and interest are paid back. Any comments?

A: Your worry is reasonable. Nobody knows who will end up in rest home care or similar and for how long. And it's better if your mum can pay her own way and make her own choices.

However, she's not expected to spend every last cent on care. At a certain point, the Government steps in with the residential care subsidy. It works like this:

 If your mother lives on her own (or has a partner who is already in residential care) and she goes into a rest home, she's expected to pay for the care until her total assets decrease to $213,297. After that she will qualify for the subsidy.

 If she lives with a partner and one of them goes into care, the couple is expected to pay for the care until their assets decrease to $116,806 not including their house and car. (An alternative cutoff is $213,297, including a house and car.)

There's also an income assessment that may affect the amount of your subsidy. For more on all of this, see this page.

How does a reverse mortgage fit into this?

When the Ministry of Social Development is measuring your mother's total assets, it will look at the net value of the home minus the mortgage - including all accumulated interest.

If she is on her own and needs to go into residential care, it's likely that she would use up her own savings and then sell her home to pay for care. If she had a reverse mortgage, that would be paid off when the home is sold - speeding up the time at which she would start to receive the subsidy.

If your mother has a partner and either of them is still at home when the other one goes into care, the fact that the couple's house has a mortgage wouldn't affect whether they got the subsidy.

It seems, then, that it doesn't make sense for your mother to avoid getting a reverse mortgage because of concerns about paying for long-term residential care.

The Ministry of Social Development does warn that it "may look into what the reverse mortgage was used for".

The ministry has "discretion to decline subsidies where an applicant has deprived themselves of income or property.

"That means the money from the reverse mortgage needs to be spent on your mum or for her benefit. So if your mum uses the reverse mortgage to spend on or give money to her family, that money may be added back into the asset test," says a ministry spokesperson.

I think that's good policy. I've heard of a woman skiting that her family was worth millions but the Government was paying for her rest home care because of the clever use of trusts.

But that's not what we're talking about here. If your mother gets a reverse mortgage for her own reasonable spending, I can't see that causing any problems later. Repaying the loan Some months ago my sisters and I found out that our ageing parents had taken out a reverse mortgage. They've not been making payments on it, so with compounding interest the size of the loan is appreciating rapidly.

We've been looking at various means of assisting them (they have no retirement savings). It's been suggested - by an adviser my parents saw recently - that the four children repay the loan, in return for which my parents transfer ownership of their house to us.

The question is, would Government policy even allow my parents to do that? Would that not be seen as a means of evading means testing on the cost of future institutional care or some such?

The Government certainly couldn't stop you doing this. It's a free country. But you're right to question whether it could affect future Government assistance.

Firstly, see the above Q&A about what your parents used the money for - although in your case it seems clear it was for their own benefit, rather than yours.

Beyond that, says the Ministry of Social Development, "It really depends on the value of the home and the amount of the loan now owing on it. The amount of the reverse mortgage is unlikely to be as much as the market value of the house. Therefore, if the children paid the value of the reverse mortgage and the house was signed over to them, we would treat the difference between the market value of the house and the reverse mortgage as deprivation of an asset."

In other words, if you four "children" pay back a $300,000 loan and take ownership of a $400,000 house, your parents have given you - or deprived themselves of - $100,000.

The ministry continues, "If the parents decided to apply for a residential care subsidy (RCS) at a later date, the ministry would most likely include the amount of this asset (the difference between the market value and reverse mortgage) in the Financial Means Assessment."

My interpretation: this is because some parents could deliberately make gifts to their children so they can get more out of the Government.

"Moreover," says the ministry, "as they do not own the house they would have to meet the asset level which is currently set at $213,297.

"They would not have the option of meeting the lesser threshold of $116,806 and excluding the house and car from the assessment."

Another issue, for both you and the previous correspondent, is the possible use of an interest-free residential care loan to help pay for care.

In your case, your parents wouldn't be able to get such a loan because they would no longer own the house.

But this is all getting too complicated! See this page, which explains things clearly. You can download a brochure, or ring a number where you can talk through your situation.

Where does this leave you? Perhaps with you and your sisters repaying the loan but not taking ownership of the house - on the assumption or agreement that you will inherit the house later.

Relationship property

Several readers have sent interesting letters in response to last week's Q&A about relationship property. We're out of room this week, but will publish some of the letters over the next few weeks.

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.

People dont have to be gullible to invest unwisely, just greedy. Sometimes when huge returns are being promised, your focus is diverted from the obvious warnings.

You almost trip up on the red flags. As Mary mentioned, you dont double your money in three months without taking huge risks, such as derivatives.

Why cant you get your money out on demand?

Given that there are probably more false claims of being a Christian today than there are true Christians, I would take the need to make the "Christian company" claim as a warning sign. They are trying to align themselves with Christian values to gain trust and confidence.

It is a paradox for a company to claim it operates by Christian values and at the same time promote high return/high risk financial products when Christian teaching on money can be summed up by "For the love of money is the root of all evil".

I hope your friends get their money back in April. If there is a further delay then it is almost certainly gone.

And dont fall for the bait trick. They receive their investment back and brimming with confidence invest a much larger sum which is ultimately lost.

Owen (New Zealand) |
11:20AM Sunday, 17 Feb 2013

Fraudster Warren Pickett (Hawke's Bay) was a Christian.. played the organ in church and took all the church's money... along with that of many of the congregation.So much for christians!!

TheOwl (Auckland Central) |
12:25PM Sunday, 17 Feb 2013

Dear Mary, just how much does money devalue over any given 10 year period.And taking into account how much living costs rise.Auckland rates will be doubling every ten years the way things are going with Len running things.